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3 Investment Methods Off the Beaten Path

by Darwin on October 9, 2012

Always one for highlighting investment themes and asset classes off the beaten path, I thought I’d share a few that have been catching more attention of late. Many people reading this already have the traditional company/employer-sponsored investment plans and pension plans, but there are some ways to invest outside the normal stock/bond/income investment mix:

World Events – With the impending Presidential election, “world event” markets like Intrade have been garnering much attention in recent weeks. I must admit, I was live-tweeting the recent Obama-Romney debate and kept checking Intrade throughout. It was fascinating to see Obama’s odds of winning drop from the mid-70s into the 60s. It’s very predictive, moreso than national polls often times, because people are betting with their own money and in real time, as opposed to the latest Gallup poll which is often out of date by the time it’s been published. If politics isn’t your thing though, you can speculate on everything from gas prices to hurricanes. This isn’t just a form of gambling, since many small business owners and even consumers legitimately want to hedge against natural events and commodity prices.

Peer Lending – I was a very early adopter of Prosper.com and unfortunately, peer lending is no longer allowed in my state, but many states do allow prosper, lending club and others to operate. I view it as taking out the middle man in that people often have to rely on credit card debt at 25%+ rates and can’t get the single-digit bank loans people with better credit can. So, that’s where the peer lending market fills the gap. I used to make loans at anywhere from 8% to 15% depending on the creditworthiness and story behind each individual borrower. By spreading loans across dozens of individuals, risk was mitigated. In all honesty, I think my annualized returns over the 3 years I held notes was about 2%. One problem was that I initiated most of these loans going INTO the great recession. So, I had basically been lending at artificially low rates into a deteriorating credit storm. I think coming out of the recession, it might be the opposite, where you can lend at high rates into an improving environment (assuming the fiscal cliff is avoided).

Financial Spreads – Depending on where you live, there are different phrases for essentially the same thing – Financial Spreads. With worldwide currency trading, you can basically exploit very small moves in various currencies by simply betting on the differences (spreads). Now, this isn’t for the faint of heart, but if you are a student of geopolitics and economics and can see market inefficiencies, there is money to be made. In retrospect, who couldn’t see the Euro weakening as news of the maladies of the various member states continued to break? Future financial crises will present similar opportunities; it just comes down to outsmarting the market.

If you’re looking for alternative investments, I’d definitely look at investments in local brick and mortar businesses. I’ve seen a lot of opportunities that would return ~100% per year if you ran them yourself, maybe 40% per year if you hired someone. Sure there’s the risk of business collapse, but if you keep your bets small it should be lucrative overall.